2014 (1) TMI 711 - HC - Income Tax

Determination of book profit u/s 115J - Held that - Following Karnataka Small Scale Industries Development Corporation Ltd., Vs. Commissioner of Income-Tax 2002 (12) TMI 4 - SUPREME Court - Section 115J, therefore, involves two processes. Firstly, an assessing authority has to determine the income of the company under the provisions of the Income-tax Act. Secondly, the book profit is to be worked out in accordance with the Explanation to section 115J(1) and it is to be seen whether the income determined under the first process is less than 30 per cent of the book profit. Section 115J would be invoked if the income determined under the first section (1) of section 115J gives the definition of book profit by incorporating the requirement of section 25 of the Companies Act in the computation of the book profit. Brought forward loss or unabsorbed depreciation whichever is less would be reduced in arriving at the book profits. Sub-section (2), however, provides that the application of this provision would not affect the carry forward of unabsorbed depreciation, unabsorbed investment allowance, business losses to the extent not set off, and deduction under section 80 J, to the extent not set off as computed under the Income-tax Act - The very object of the provision of section 115J is to tax such companies which are making huge profits and also declaring substantial dividends but are managing their affairs in such a way as to avoid payment of income-tax - Decided in favour of assessee.

Summary

Issues:
1) Interpretation of provisions under Section 115J of the Income Tax Act regarding computation of loss to be carried forward.
2) Whether the Income Tax Appellate Tribunal was correct in law in holding that the assessment order containing only a working for determination of book profit under Section 115J justified the Commissioner's decision to decline other grounds related to loss determination.
3) Whether the interpretation of Section 115J in respect of determination of carry forward losses conflicts with other provisions of the Act.

Analysis:

Issue 1:
The case involved questions regarding the computation of loss to be carried forward under Section 115J of the Income Tax Act for the assessment year 1989-1990. The Tribunal's Order raised concerns about the relationship between determining profit under Section 115J and the computation of loss to be carried forward. The Court clarified that the two processes are distinct and independent. The Appellate Tribunal's decision was upheld regarding the correctness in law of the computation of loss to be carried forward under Section 115J.

Issue 2:
The primary issue revolved around whether the Tribunal's decision on the assessment order, which focused solely on determining book profit under Section 115J, justified the Commissioner's refusal to address other grounds raised by the appellant related to loss determination under different Act provisions. The Court emphasized the separation of processes and upheld the Tribunal's decision, noting that the assessment order's limited scope did not necessitate addressing other grounds raised by the appellant.

Issue 3:
Regarding the interpretation of Section 115J in respect of determining carry forward losses and its potential conflict with other provisions of the Act, the Tribunal's decision was upheld. The Court referred to relevant sections of the Income Tax Act, emphasizing the need for separate determinations under normal provisions of the Act. Despite the Commissioner's dismissal of the appeal, the settled law as per the Supreme Court's ruling favored the assessee, leading to a decision in favor of the assessee against the revenue.

In conclusion, the judgment clarified the distinct nature of processes involved in determining profit under Section 115J and the computation of loss to be carried forward. It emphasized the need for separate determinations as per the Act's provisions and upheld the Tribunal's decision while ruling in favor of the assessee against the revenue based on established legal principles.